Shell Ethylene Cracker

March 2013

In June of 2011 Shell Chemicals announced plans to build a world-scale ethylene cracker with integrated derivative units in the Appalachian region of the U.S. This set of a battle between the states of Ohio, West Virginia and Pennsylvania for the estimated more than 12,000 jobs and significant taxes. In the end Pennsylvania won with the selection of Monaca, near Pittsburg. Since then Shell has signed a land option but is apparently delaying approval of the investment. Many now say that the investment will not occur. Let’s examine Shell’s potential decision process and outcomes.

Why the ethylene complex is long shot. Chemical complexes tend to cluster together for good reason. Output of one chemical plant feed the needs of others. Multiple suppliers allows for supply security and competitive offering. Utilities, infrastructure and administration can be shared reducing overhead costs. They tend to attract large pool of services and parts vendors which ensures competitive support. In the U.S. that means the Gulf Coast, not Monaca PA. To gain additional economies of scale for their ‘world-scale’ facility Shell is likely looking for other consumers of ethylene. This may be difficult as ethylene consumers prefer two sources of local supply to ensure product for planned and unplanned outages.

Why the ethylene complex is a sure thing. The location, in the heart of the Marcellus shale reduces the transportation cost of natural gas fuel and ethane feedstock. Shell needs additional ethylene and derivative supply or risks losing market share to competitors. Within a 300 mile radius downstream customer abound, thus reducing logistics and working capital cost on the other end. World class road, water and rail infrastructure is in place with capacity to spare in contrast to the congestion in the Gulf Coast. Monaca is in the heart of other manufacturing, the talent, service, parts and support pool can be adopted.

What might be happening, our bet. In order to gain economies of scale Shell could be in discussions with multiple downstream customers, which takes time. They in turn could be in discussions with another company for a second ethylene complex, which takes time. The shale gas revolution gave birth to the chemical renaissance with a massive set of ethylene and derivative investment in the Gulf Coast, most of which will be on line by 2016. That will cause overcapacity and prices to plunge in a typical chemical commodity cycle. There is no need to open a new ethylene complex in this environment, rather wait until the excess supply finds a market.

In summary we believe the Shell Appalachian ethylene complex will happen. It will be later than anyone expects. It also will be large in scale, with more ethylene derivatives, a second ethylene cracker and other chemical companies taking part. Thus this could become a new hub for chemical investment in the U.S.

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